Fiscal Policy, Home Production and Growth Dynamics

Abstract

Using an endogenous growth model with physical and human capital, we explore short-run as well as long-run effects of fiscal policy in the presence of households' production activities. We first show that our model has a unique balanced-growth path that satisfies saddlepoint stability. We then conduct fiscal policy experiments both in and out of the balanced-growth equilibrium. The main focus of the paper is to study the dynamic behavior of the model economy and the effects of fiscal actions analytically. In so doing, we examine how the presence of home production yields the policy implications that are different from those obtained in the standard setting that does not consider home production.